Gold Prices Battle Back, But Face Long-Term Threats

Gold prices are volatile again, but this time, not for the usual reasons.

Prices are basically flat on a year-to-year basis, trading at about $1,300 an ounce on average. That figure has bounced up and down, however.

Gold prices have generally trended upward since mid-July, when the precious metal was trading at $1,210, according to Y-Charts Gold Indicator Index.

Challenging gold’s growth is the prospect of a stronger U.S. economy and a sturdy dollar, the latter bolstered by recent favorable news from the Federal Reserve.

“The FOMC's signals for the start of unwinding QE and another rate hike by the end of the year were exactly what the U.S. dollar needed to turn the corner,” said Christopher Veccio, senior currency strategist at DailyFXcom in a research note.

There may be a more ominous force working against gold prices over the long term: cryptocurrencies like Bitcoin.

“Having waited patiently for the any-minute-now moment, gold investors are taking comfort from the recent rise in price in response to geopolitical tensions,” Mohamed El-Erian, chief economic adviser at Allianz SE, wrote in an August column for Bloomberg.

The responsiveness of gold, as well as the overall price, appears weaker than would have been expected from historically based models, he added.

“The precious metal’s status as a haven has been eroded by the influence of unconventional monetary policy and the growth of markets for cryptocurrencies,” El-Erian wrote.

Also, some of the traditional buyer interest in gold has been diverted to the growing markets for cryptocurrencies, which are also benefiting from a general increase in demand, El-Erian wrote.

“As such, the returns to investors there have been significantly greater, sucking in even more funds,” he concluded.

'So Many Factors'

In the short-term, more conventional issues are challenging gold prices right now, although the yellow metal is showing short-term signs of fighting back.

“There are so many factors that contribute to where the price of gold is trading today, but the main factors are the value of the U.S. dollar, Treasury yields and the U.S. equity market,” said Walter Pehowich, executive vice president of Dillon Gage Metals.

The price of gold has been under pressure of late, primarily due to recovering U.S. Treasury Bond yields, Pehowich said.

“The ten-year Treasury (rate) … has brought the level of gold down to its strong support levels,” he noted. “We believe that the decline in the gold price has played itself out and will trade higher the rest of the year.”

Gold traders say consumer demand remains strong in the face of a more robust U.S. economy.

“We've had more people contacting us this month than in numerous months about buying gold and silver,” said Michael Fuljenz, president of Universal Coin & Bullion, in Beaumont, Texas. “Gold is in a stealth bull market and the public wants gold and silver. There’s a likely chance gold will hit $1,400 by year’s end.”

Another impact on gold prices is inactivity from the Republican-controlled U.S. Congress. With health care on the legislative docket, precious metal experts say another upward move from gold could be imminent if tax reform dies on the vine.

“Gold prices have tended to rise this year whenever one of the president's top priorities has failed to translate into new policy,” said Joseph Yaffe, co-owner of Gainesville Coins in Gainesville, Fla.

A Confidence Game

The most obvious example is the attempts to replace Obamacare, which have stalled in the Senate on multiple occasions this year already, Yaffe said.

“This is partly due to the far-reaching tax implications of health care reform,” he explained. “If Washington cannot strike a deal on fixing the Affordable Care Act, or enacting the tax cuts that President Trump has advocated for, confidence in economic growth wanes, and demand for gold rises.”

“If anyone is inclined to think that gold hasn’t had a good year in 2017, I offer this take,” Pehowich said. “Equity investors readily point to the Dow’s 41 record highs this year. The Dow was trading at 19,762 at the start of the year and is now trading at 22,390, an increase of 13.3 percent.”

Gold, however, increased by about 14 percent so far this year, he noted. Gold prices plunged in the final weeks of 2016, leading to the hefty 2017 gains.

“As an investment, gold beats the Dow in 2017 and will likely continue to trade higher the rest of the year,” Pehowich said.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at brian.oconnell@innfeedback.com.